Financial Reporting: 

Fair Value Reporting

 

How should assets and liabilities be reported in the financial statements?

Position: All assets and liabilities should be reported at fair values based upon market values for identical or similar assets or liabilities.

Rationale:

• Fair value information is the only information useful for investment decision-making

• All investor decisions to buy or sell assets, or to lend or borrow money, are based on current fair market values

• Thus, investors require up-to-date information on the fair values of assets held by a company and the claims against those assets

• Fair values should be determined based upon the market values for identical or similar assets or liabilities

• Where models are widely used in the markets for valuing financial instruments, the models should be applied using market inputs

• Entity-specific or managers’ estimates of fair values based upon their own judgments do not qualify as fair values

• At a minimum, all financial instruments should be reported at fair values

 Where stated: SEC CIFiR 08 (PDF); IAS 39 - Fair Value Option 05 (PDF); ED 7 Finl Inst Disclosures 04 (PDF); IAS 39 - FV Recog and Msrmt 04 (PDF); FAS 150 Fatal Flaw Review 03; IAS 32 and IAS 39 Improvements ED 02; FAPC - FAS 133 02; JWG - Finl Instr 02; Comprehensive Business Reporting Model;

 

Opposing Argument:

• Some have argued that fair value measurement will introduce estimates, inaccuracies and subjectivity into the financial statements, reducing their reliability and usefulness to investors and other users.

 

CFA Centre’s Position Regarding Opposing Argument:

• This argument is disingenuous at best, and displays a lack of understanding of financial reporting at worst

• All numbers in the financial statements, including cash, are estimates rather than precisely correct figures

• The alternative to fair value is historical cost measurement. Although historical cost measures in many cases reflect fair values on the date of the transactions, such numbers are not updated or revised from the transaction date onward

• Hence, the numbers are increasingly out-of-date as time passes and do not reflect the economic effects of the company’s operations and managers’ decisions

• Furthermore, because many of the historic cost numbers are subject to arbitrary and varying amortization schedules, or estimates of impairment, the numbers may more accurately be said to reflect the whims of managers rather than economics, and their usefulness may be marginal at best

• Since all financial decisions are based on fair values, the financial statement items should be measured based on fair values